Bill gives cities break on pensions

Municipalities allowed to delay payments into funds, but critics say it won't help long-term.

October 25, 2009|By Jarrett Renshaw and Christopher Baxter OF THE MORNING CALL

Steep declines on Wall Street and the sluggish national economy pummeled the pension funds of the Lehigh Valley's three cities last year, resulting in a combined loss of more than $85 million.

The massive dip -- familiar to those with 401(k) retirement funds -- threatened to dramatically increase the annual contributions the cities must pay to pension plans, and possibly, increase taxes.

But state lawmakers, prompted by warnings of a financial collapse in Philadelphia, bailed out municipalities across the state with a pension bill passed last month that establishes new financial standards and provides short-term budgetary relief for municipalities facing declining revenues.

The bill, known as Act 44, allows municipalities to pay less annually to account for investment losses and spreads the payments needed to cover those losses over a longer period.

In addition, municipalities may artificially increase the value of their pension funds by 30 percent -- up from 20 percent -- to account for the volatility of the market and to reduce the impact of the 2008 losses.

Critics of the bill say it bails out politicians, not the state's taxpayers, and does nothing to address the underlying financial problems of a pension system they describe as unsustainable.

The crisis offered Harrisburg lawmakers a rare opportunity to enact true pension reform, critics say, such as weaning municipalities from defined retirement plans, which they see as the main source of the problem.

Instead, lawmakers chose the predictable and politically expedient approach of delaying pension spikes and kicking the problem down the road.

"This is not reform, this is just deferring costs to future generations," said Richard Dreyfuss, a pension specialist and fellow at the Commonwealth Foundation, a conservative think tank in Harrisburg. "We are putting less money in plans that are already underfunded and depleted by recent events. That's not a good recipe."

Without the bill, supporters say, already struggling cities and municipalities would have been left with little option than to increase taxes to cover the higher pension payments.

On Jan. 1, 2008, the combined value of Allentown's, Bethlehem's and Easton's pension funds were $305 million. By the end of 2008, the declining stock market and other investments dropped the value to $223 million, a 27 percent decrease, according to records. State estimates issued in March indicated that the 2008 investment losses would have forced Allentown to kick in to its pension fund an additional $4.2 million, Bethlehem an additional $2.7 million and Easton an additional $1.3 million, all in 2011, the first year they would have to account for those losses.

Allentown Mayor Ed Pawlowski, facing a roughly $9 million budget deficit this year, expects to make quick use of the new legislation.

He plans to cut the city's $12.3 million pension contribution next year by nearly $2 million, using a provision of the bill that deals with helping struggling cities immediately.

The legislation gives the municipalities the option to reduce those payments by 25 percent during the next six years, a provision aimed at providing cities some immediate financial relief as the economy rebounds.

Allentown Controller Bill Hoffman recently warned City Council that the mayor's plan to take advantage of the option and cut its pension contributions next year comes with a stiff penalty.

"We eventually have to pay this bill, and when we do, it's going to hurt, real, real bad. Hoffman said, equating the move to borrowing from the pension fund to pay operating costs.

"We are putting in less money, yet our liability will continue to grow. That's not a good idea," Hoffman said.

Pawlowski defended the decision, saying it's "prudent for the city to take advantage of the opportunity and not pass along another $2 million in pension costs to our taxpayers during the current economic climate."

Bethlehem and Easton are taking a much more conservative approach, at least in the short term.

Bethlehem plans to maintain its pension funding levels next year, according to Budget Director Mark Sivak.

"We are going to have to pay someday, so we don't see the need to cut that payment now," Sivak said.

Sivak said officials will consider using the other options included in the bill next budget season.

The same goes for Easton. "We looked at our options, and right now we are going to take a conservative approach and maintain our funding levels," said Easton Administrator Glenn Steckman.

The impact of the 2008 investment losses would not have been felt until 2011, because that's the next year municipalities are required to adjust their pension fund payments.

That adjustment is based on a state-required actuary study, conducted every two years, that takes a snapshot of the funds' assets and liabilities. The last snapshot was taken on Dec. 31, 2008, a low point of the market.